Microfranchising: the growth solution for Posts in countries with smaller economies

India Post has successfully simplified the traditional, business franchise model and used it to expand its network of post offices. Should Posts in countries with smaller economies do the same to become more viable?

This article was first published as a LinkedIn article in November 2017. It was reposted in the following Groups: Postal Innovation and The Economist Newspaper readers.

Microfranchising: the growth solution for Post Offices in countries with smaller economies

Many Postal Administrations, in countries with smaller economies, face significant challenges. The digital revolution has left them far behind and they require annual, government subsidies to survive. These Posts lack the money to invest in the expansion of their post office network that would give them economies of scale and improved revenues. Can they learn from India Post’s successful simplification of the traditional, business franchise model and use of it to expand its network of post offices?

What is franchising?

Franchising is a way for a successful entrepreneur (franchisor) to grow the business by licencing other entrepreneurs (franchisee) to replicate the business and open a new location in a defined geographic area.

Typically, the franchisees pay the franchisor an initial franchise fee and then they pay a percentage of ongoing sales.

The franchisor, allows the franchisees to use his brand name, logo, signs, store furnishing and design style or “look-and-feel”. The franchisor also provides them the brand standards, KPIs, operating manuals, training, ongoing support, oversight, quality control and ongoing brand marketing. The job of the franchisees is to manage their business location, staff and maintain the brand standards.

It’s a symbiotic relationship that is good for both parties. If the franchisor keeps the franchises healthy and profitable then everyone will be successful.

What are franchise-agencies?

Agents simply sell goods on behalf of a manufacturer, at the price that has been set. Agents receive a commission for their work. Post Offices often have agents or shopkeepers who sell postage stamps.

A franchise-agency has all the attributes of a franchise stated above, but allows the franchisee to also continue to use his brand. It’s a store within a store. Using a shared-counter concept, the franchise-agent sells products or services over the same counter as his host business and uses his existing sales staff. The franchise-agency model can be extremely effective in countries with smaller economies, when implemented properly.

For example, M-Pesa, the mobile-money operator (MMO), enabled financial inclusion and changed banking in Africa. This year (2017) it celebrated its 10th anniversary. CNN reported that 30 million people in 10 countries use M-Pesa for a range of services including international transfers, loans and health provision.

M-Pesa created an extensive network of franchise-agencies by partnering with retailers who already had a substantial distribution networks like petrol stations, distributors, supermarkets, selected banks, micro-finance institutions and with Safaricom’s 85,000 authorized dealers. It also partnered with individual, registered SMEs. M-Pesa ensured that all agents were properly trained, coached and monitored at least once every two weeks.

Why postal franchises?

More than 60% of Posts worldwide have some form of franchise-agent post offices using varying financial arrangements. In many cases, the Postal Administration’s franchise system is either too generous or does not pay enough. Both are problematic.

Post office franchises, located in privately owned businesses, increase citizen access to postal and other services because they offer longer hours in more locations. Franchises also have a lower cost-to-sell. Selling products through a franchise usually costs less than half of the cost compared to selling the same products through a corporate-owned post office.

To put a post office franchise in a host business, the entrepreneur has to give up real-estate space. That, together with the dedicated labour, adds cost to the host business. Therefore the post office franchise has to, at the very least, break-even.

Franchisees know that the post office franchise will bring in customers and 30% of them will buy something in the host business making it more profitable. That’s the real value-proposition.

What is microfranchising?

Microfranchising is an economic development engine that follows in the footsteps of microfinance, microloans and microcredit.

In 1974, Professor Muhammad Yunus, a Bangladeshi economist from Chittagong University, sparked the beginning of a worldwide movement by lending $27 from his own pocket to 42 poor, basket weavers. Since this catalytic event, microfinancing organizations have provided over 11 million women around the world with the business training and the microloans that they need to help start or improve a small business, provide for their families and escape the cycle of poverty.

In many countries in the world, necessity entrepreneurship is a way of life. With low barriers to entry, other vendors in the same market simply replicate entrepreneurs that have a successful new idea. Few of them have business acumen. Eventually the market is saturated and they all make less and less money.

Microfranchising is scaled down or simplified franchising. Simply defined, it is the systematization and replication of a successful micro-enterprise. It generally requires minimal start-up investment and is easy to maintain.

While microfinancing requires some preexisting entrepreneurial talent, microfranchising better addresses the real need in emerging markets by providing a proven “business in a box” with brand standards, operating manuals and training, ongoing support, oversight, quality control and marketing….as well as reduced risk, a financing structure, service delivery processes, tools, inventory, supply chain process for replenishment at reasonable cost and ongoing support to ensure continuing success.

Ared uses solar-kiosk microfranchises to charge 80 phones at a time in Rwanda. The initial franchise fee is $100US and $200US in instalments. Microfranchisees make 30,000 to 85,000 Rwandan francs ($38-$107US) a month, enough to pay rent and feed a family. For microfranchisees who are women or have disabilities, the opportunity is absolutely free.

The India Post Model

India Post has a network of over 155,000 post offices. On average, a post office serves an area of 21 square kilometers and a population of 8,000. India Post envisioned a post office at every 1 km in urban areas and 3 km in rural areas.

To ensure access to basic postal facilities throughout the country, in 2007, India Post introduced a simplified “Franchise Scheme” to open franchise outlets where a post office could be opened such as fast-developing areas on the fringes of the cities.

The franchise is open to corner storeowners (18 or older with 8th grade education), institutions, organizations, educational institutions, urban townships, etc. with properly located and accessible premises that are well maintained. Preference is given to postal pensioners and those able to offer computer facilities. In AllahaBad, postal franchises are offered to unemployed youth who could open a post office in their home or shop.

There must also be space for postal signage. The business must be viable with monthly revenue of at least 50,000 rupees ($1,000US). Universities, schools or professional colleges could also apply and open a post office for students.

The applicant is asked to generally invest 1 to 1.5 lac ($2,000 – $3,000US) and provide a minimum, security payment of 5,000 rupees ($75US) to India Post in the form of NSC (National Savings Certificates).

The applicant submits an application with references and, if accepted, signs a memorandum of understanding with India Post. India Post provides training, operating manual, all India Post brand signage and all logistics (mail pickup and delivery). Franchises can choose to be automated (POS) or manual. The franchisee must provide the computer and printer. India Post will provide the software and barcode stickers or the manual receipts.

The franchisee receives a commission per transaction: stamps and stationery (5%commission), 3 rupees ($.05US) per registered post, 5 rupees ($.08US) per speed article booked, and 3.5 to 5 rupees for money orders. Franchises are generally open until 8PM offering more access and longer hours.

Of course, total franchisee revenue depends on location, services sought and effort. Franchisees that have focused on providing exceptional customer service have won customer confidence and succeeded financially.

In this postal franchise model, the entrepreneur does not have to give up real estate. It is not a break-even value proposition. Whatever revenue the post office franchise brings in is incremental revenue that will help the host business be more viable. It will also bring in footfall (customer traffic) and these customers will buy in the host business.

Are microfranchised Post Offices the answer for countries with smaller economies?

The biggest asset any Postal Administration is its “reach” or its network of post offices. A reach or presence in virtually every community has value and can be monetized. The Post can act as agents for banks, financial institutions, telecoms, utilities, government, NGOs, retailers and more to offer services, on their behalf, throughout that network.

With “reach” any Postal Administration, even one in a country with a smaller economy, can support sustainable economic development. It can become the country’s connecting infrastructure promoting its government’s social economic development plans, financial-social-digital inclusion, MSME development, as well as export trade and domestic commerce. The Post can also diversify and sell health and solar products that may be needed in underserved regions.

Many Posts, in countries with smaller economies, do not currently have a proper network that is appealing to prospective partners. Some post offices may be in wrong locations and therefore unprofitable. While in other locations, where most people shop, there may be no post office at all.

Locating a microfranchise post office within small businesses, as India Post has done, will make both businesses more viable. It will increase citizen access to postal and other services and lower the Post’s cost to provide the service and therefore be more viable.